Proposed Program Elements

Proposed rule 22e-4 would require each fund to adopt and implement a written liquidity risk management program that is designed to assess and manage the fund’s liquidity risk.111

Under the proposed rule, liquidity risk would be defined as the risk that a fund could not meet

108 _{Under proposed rule 22e-4(a)(5), “fund” means “an open-end management investment company that is}

registered or required to register under section 8 of the Act (15 U.S.C. 80a-8) and includes a separate series of such an investment company, but does not include a registered open-end management investment company that is regulated as a money market fund under § 270.2a-7.”

109 _{In addition to the seven-day redemption requirement in section 22(e), rule 15c6-1 under the Exchange Act}

also impacts the timing of open-end fund redemptions because the rule requires broker-dealers to settle securities transactions, including transactions in open-end fund shares, within three business days after the trade date. See supra note 21 and accompanying text. Furthermore, funds’ redemption obligations are also governed by any disclosure to shareholders that a fund has made about the time within which it will meet redemption requests, as disclosures by open-end funds are subject to the antifraud provisions of the federal securities laws. Seesupra note 77 and accompanying text.

110 _{See infra section IV.C.1.}

45 requests to redeem shares issued by the fund that are expected under normal conditions, or are reasonably foreseeable under stressed conditions, without materially affecting the fund’s net asset value.112 _{Proposed rule 22e-4 specifies that a fund’s liquidity risk management program}

shall include the following required program elements: (i) classification, and ongoing review of the classification, of the liquidity of each of the fund’s positions in a portfolio asset (or portions of a position in a particular asset); (ii) assessment and periodic review of the fund’s liquidity risk; and (iii) management of the fund’s liquidity risk, including the investment of a set minimum portion of net assets in assets that the fund believes are convertible to cash within three business days at a price that does not materially affect the value of that asset immediately prior to sale.113

Proposed rule 22e-4 incorporates specific requirements for each of these program elements, and these requirements are discussed in detail below. A fund may, as it determines appropriate, expand its liquidity risk management procedures and related disclosure concerning liquidity risk beyond the required program elements, and should consider doing so whenever it would be necessary to ensure effective liquidity management. A fund would be required to set and invest a prescribed minimum portion of net assets in assets that are cash or that the fund believes are convertible to cash within three business days at a price that does not materially affect the value of that asset immediately prior to the sale, and also would be required to classify the liquidity of the fund’s portfolio positions. In other respects, the proposed program requirements are more

112 _{Proposed rule 22e-4(a)(7). This definition is similar to the definition of “liquidity risk” that the}

Commission has used in other contexts, modified as appropriate to apply to the specific liquidity needs of investment companies. See Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 70072 (July 30, 2013) [78 FR 51823 (Aug. 21, 2013)], at n.291 (“Generally, funding liquidity risk is the risk that a firm will not be able to meet cash demands as they become due and asset liquidity risk is the risk that an asset will not be able to be sold quickly at its market value.”).

This proposed definition contemplates that a fund consider both expected requests to redeem, as well as requests to redeem that may not be expected, but are reasonably foreseeable. See infra section III.C.

46 principles-based and would permit each fund to tailor its liquidity risk management program to the fund’s particular risks and circumstances.

The requirements of proposed rule 22e-4, including the liquidity risk assessment requirements, are applicable to all open-end funds, which term is defined to include each separate series of a registered open-end investment company.114

Therefore, each series of a fund would be responsible for developing a liquidity risk management program tailored to its own liquidity risk in order to comply with the proposed rule. We anticipate that liquidity risk could differ—sometimes significantly—among the series of an investment company, based on variations in each of the proposed liquidity risk assessment factors required to be considered. Under these circumstances, it would be appropriate for each series’ liquidity risk management program to incorporate risk assessment and risk management elements that are distinct from other series’ programs. However, to the extent that the series of an investment company are substantially similar in terms of cash flow patterns, investment strategy, portfolio liquidity, and the other factors a fund would be required to consider in assessing its liquidity risk,115 _{it may be}

appropriate for each series to adopt the same or a similar liquidity risk management program. Proposed rule 22e-4 includes board oversight provisions related to the liquidity risk management program requirement. Specifically, a fund’s board would be required to approve the fund’s liquidity risk management program, any material changes to the program, and the fund’s designation of the fund’s investment adviser or officers as responsible for administering the fund’s liquidity risk management program (which cannot be solely portfolio managers of the

114 _{See proposed rule 22e-4(a)(5).} 115 _{See infra section III.C.1.}

47 fund).116 _{A fund also would be required to disclose certain information about its liquidity risk}

and risk management in its registration statement,117 _{as well as on proposed Forms N-CEN and}

N-PORT.118

2. Scope of Proposed Rule 22e-4 and Related Disclosure and Reporting